EC adopts new guidelines on renewable energy, biofuel support

By Erin Voegele | April 15, 2014

The European Commission recently announced it has adopted new rules on public support for projects in the field of environmental protection and energy. According to the commission, the guidelines promote a gradual move to market-based support for renewable energy. The new rules are described as aiming to support member states in reaching their 2020 climate targets while addressing market distortions that may result from subsidies granted to renewable energy sources. In addition to renewable electricity generation, the guidelines also address aid given to biofuel facilities.

Regarding the introduction of market-based mechanisms, the commission said some renewable energy technologies have reached a stage of maturity that calls for their integration into the market. As such, the guidelines call for a gradual introduction of a competitive bidding process for allocating public support while offering member states some flexibility to account for national circumstances. A pilot phase in 2015 and 2016 would allow member states to test competitive bidding procedures in a small share of new electricity capacity. Beginning in 2017, the guidelines call on member states to set up tenders to grant support to all new installations. According to information released by the commission, the new guidelines would also include the gradual replacement of feed-in tariffs with feed-in premiums, which it said will expose renewable energy sources to market signals. Small installations, however, would fall under a special regime that could be supported with feed-in tariffs.

Information released by the commission specifies that small installations and technologies in early stages of development could be exempted from participating in the competitive bidding process. For biomass, solar and many other renewable sources, small installations are defined as those with a capacity of 1 MW or less. For wind, small installations are defined as those producing 6 MW of energy or less.

The commission also noted that installations of 500 kW or less for biomass, solar and other energy sources can continue to benefit from any form of aid, including feed-in tariffs. For wind, the cut-off is 3 MW. This exemption is included in the guidelines because projects of this size are considered to have less potential to participate in the wholesale market.

In 2017 and later years, member states can be further exempt from the competitive bidding process in cases where these states can demonstrate that a bidding process would lead to an unsatisfactory outcome. For example, in situations where there are is very limited number of eligible projects or sites or because competitive bidding would lead to higher support levels or would result in low project realization rates.

The commission also points out that charges levied to fund renewable energy make up an increasing proportion of industry energy bills. Therefore, the guidelines allow for reducing this cost to a limited number of energy intensive industrial sectors across the entire European Union, with allowances for member states to expand that provision to energy-intensive companies in other sectors.

Additional provisions include supporting cross-border energy infrastructure and a feature that aims to permit aid to secure adequate electricity generation when there is a risk of insufficient electricity generation capacity.

With regard to biofuels, which are defined as liquid or gaseous fuels produced from biomass and used for transport, the guidelines state that “in view of the overcapacity of the food-based biofuel market, the commission will consider that investment aid in new and existing capacity for food-based biofuel is not justified.” Investment aid, however, is allowed to cover the costs of converting food-based biofuel plants into advanced biofuel plants. “Other than in this particular case, investment aid to biofuels can only be granted in [favor] of advanced biofuels,” the guidelines continue.

The guidelines go on to explain that while investment aid to support food-based biofuel will cease once the guidelines are in force, operating aid for food-based biofuels can only be granted until 2020. In addition, the guidelines indicate the commission considers that aid for biofuels does not increase the level of environmental protection and therefore is not compatible with the internal market if the aid is granted for biofuels that are subject to a supply or blending obligation, unless a member state can demonstrate that the aid is limited to sustainable biofuels that are too expensive to come on the market with a supply or blending obligation only.

Nina Skorupska, chief executive of the U.K.-based Renewable Energy Association, called the commission’s guidelines a “huge leap into the unknown.”

“Policies which pay developers a fixed price for their power have been shown to work and deliver a major increase in renewable electricity – up to 15 percent last year. These new guidelines are based on economic modelling which suggests that competitive mechanisms will deliver equally good results at lower cost to the consumer. We support measures to reduce policy costs as renewables continue their journey towards price parity with fossil fuels. But putting so much faith in untested theory is a big risk, especially when the U.K. is in such desperate need of new capacity,” Skorupska said.

In a statement, the REA also noted that how the U.K. government interprets the exemptions provided in the guidelines will significantly impact the ability of farmers, businesses and community groups to operate within feed-in tariffs. “Farmers, businesses and community groups have become important participants in the UK electricity supply thanks to the simplicity of the feed-in tariff. It has also enabled electricity-intensive companies to save money by supplying their own clean power. These new players in the energy mix are unlikely to be able to make new projects work under contracts for difference. We hope the government will be able to support this diversification in the energy mix through the state aid guidelines exemptions, not least so that it can fulfil its exciting new community energy ambitions,” Skorupska continued.

Regarding biofuels, the REA noted that it remains concerned that the guidelines do not realize the full long-term value of sustainable biofuels in decarbonizing the transportation sector. “Renewable energy targets are not an end in themselves; they are a means for decarbonizing the energy mix and improving our energy and resource security. In particular, the transport sub-target acknowledges the vital importance – and the difficulty – of decarbonizing transport. Sustainable first generation biofuels, which produce food and fuel, will remain crucial for cost-effective carbon savings in transport until at least the 2030s, when advanced biofuels and electrification could become genuine prospects,” Skorupska said.

The European Commission’s press release, fact sheet and a full copy of the guidelines can be downloaded from the Europa website.